With the Spring Budget tomorrow, the accountancy press and the business pages have been full of articles pondering exactly what the Chancellor might do. Clearly, Russia’s invasion of Ukraine has meant that whatever room for manoeuvre Rishi Sunak had is now constrained due to the need to respond to the international crisis, but one thing is not in doubt that the Treasury will bring in £12.5bn more in tax than predicted at the last Budget.
According to the Institute of Fiscal Studies (IFS) this £12.5bn is on top of the £13bn which is expected to be raised as a result of the increase in National Insurance contributions (NICs) following the introduction of the new social care levy. The main reason for this excess from the predictions made in the last budget is the freeze in income tax thresholds, which, coupled with rising inflation means that the Treasury is going to be better off than they expected.
The problem with raising income tax thresholds is, as the IFS notes, that usually they rise with inflation. However, the decision to freeze income tax thresholds was made when the level of inflation was 1.6%. Since then, inflation has risen and is now expected to reach 8% in April, with many experts predicting it to go into double figures later this year.
At the time of the Budget, the Office for Budget Responsibility (OBR) estimated the plan would bring as many as 1.3m more people into paying income tax and 1m more into paying at the higher rate. Of course, inflation means even more people are expected to begin paying tax or pay a higher rate of tax.
The problem for the Chancellor is, obviously, that the economic landscape, while not exactly great over the last two years thanks to Covid, has now changed totally with the war in Europe and the expected further impact of higher gas, oil and commodity prices on domestic (and industrial) bills. Millions face precipitous rises in costs. One of the ways to alleviate this would be cutting fuel duty, but, while welcome, this would do little to mitigate the wider inflationary impact. But averting a tax rise is about more than ameliorating a cost-of-living crisis. There are good economic reasons to stop the national insurance increase, not least because the disincentives to work and recruitment may hurt growth and reduce tax revenues.
We are also hearing suggestions that the increase in NICs may only be applied to those on higher incomes. However, we also note that the aforementioned £12.5 billion windfall could help offset the impact of keeping NICs at their current level. Will the Chancellor take the opportunity to spring a surprise tomorrow? In truth, he is facing a terrible dilemma, with rising living costs, demands to increase spending on the nation’s armed forces and security generally, and, let it not be forgotten, a mountain of debt from tackling the Covid pandemic. Who would be in his shoes?
Irrespective of what we learn tomorrow, M&S will have its usual report on the Spring Statement ready for our clients as soon as we’ve analysed what Mr Sunak has said. If you are not one of our clients but would like to receive our report, please contact me.
Vivian Linstrom, M&S Accountancy and Taxation